In a widening investigation, the Labor Department is probing more than 70 instances in which companies replaced their pension plans with annuities purchased from the failed Executive Life Insurance Co. and a dozen other potentially shaky insurance firms.
Assistant Labor Secretary David G. Ball said Friday that the agency is exploring whether these companies may have violated federal labor law by replacing their pension plan with a bargain-priced annuity from a financially weak insurance carrier.
There are "over 70 full-fledged investigations" under way, and within the next two months, the department will issue "a whole raft" of demand letters and lawsuits, attempting to force employers to protect their workers' pension by choosing safe annuities, Ball said.
In the demand letters, the government asks employers to guarantee that they will pay retirement benefits in the event of failure of the insurance firm. Employers "are nervous and they ought to be nervous," Ball said.
The expanded probe stems from an original inquiry of two companies that had allegedly improperly replaced employee pension plans with annuities sold by Executive Life, the Los Angeles-based life insurer that failed in April.
Since then, the Labor Department has received 375 referrals from the Pension Benefit Guarantee Corp., the federal agency that protects pension payments. The referrals detail instances in which firms terminated pension plans and replaced them with annuities--insurance company contracts promising monthly retirement checks.
There are no formal rules or standards for selection of an insurance company, and the subject drew little attention until California seized Executive Life, which ran into financial trouble because of its massive investments in junk bonds. The state reduced annuity payments to 70% of the normal monthly allotment. California regulators said most payments would be fully restored under a rehabilitation plan that would sell Executive Life to French investors and provide for some payments by state guaranty funds.
The PBGC now routinely asks the Labor Department to check cases in which the employer's choice of an insurance company appears risky. About half of the more than 70 firms under full investigation bought annuities from Executive Life. The others were customers of a dozen different insurance carriers, not yet named by the Labor Department.
The department argues that employers have a fiduciary responsibility not to put employee pension funds at risk when choosing an insurer to supply the annuity. But in some cases, the companies did not do that.
"They went for the cheapest policy--they went with a crummy one to save money," said Ball, who heads the Labor Department's Pension and Welfare Benefits Administration.
In June, the department sued Maxxam Inc. and its subsidiary, Pacific Lumber Co. of Scotia, Calif., and Magnetek Inc. of Los Angeles, charging that they acted "imprudently" in buying Executive Life annuities. Ball said then that the Labor Department had sent demand letters to six other employers with annuities from Executive Life. And he advised companies with Executive Life annuities to make up the 30% losses suffered by retirees.
But the department, unsatisfied with the lack of response, has gone beyond warnings and into formal investigations of many companies. The next step, within two months, will be demand letters for some firms and lawsuits for others.
The labor agency is using referrals from the PBGC to investigate virtually any case in which an employer bought an annuity under questionable circumstances from a shaky insurer.
Ball will not name the employers or the insurance companies until the government is unable to reach a settlement and files a lawsuit. "I don't want to create a run on an insurance company, or damage the insurance industry," he said.
Ball said the government has no intention of specifying which insurance company annuities are safe for employers to buy. However, the Labor Department's investigations and lawsuits will encourage pension managers at companies to choose annuities from among a relative handful of the biggest and strongest insurance carriers.